The Basics of Self-Funding and Stop Loss Insurance

Many employers are concerned about their ability to manage employee health plan costs. Balancing state-mandated benefits, state premium taxes, and the risk charges on insured health care premiums has many employers considering self-funding as an option to help reduce plan costs.

An employer self-funded plan provides health benefits to employees using the company’s own funds. This means the employer assumes the risk of paying claims for benefits.

Self-funded employers can often take advantage of several benefits generally unavailable to a traditional fully-insured benefit program, such as:

Lower operating costs

Increased cash flow

Flexibility in plan design

Better claims management

Tailored reporting

However, the biggest risk of a self-funded plan is the potential for a catastrophic claim, which can be financially devastating. A catastrophic claim may include a cancer diagnosis, end-stage renal disease, or a need for an organ transplant. This is where Medical Stop Loss Insurance can help.

Medical Stop Loss Insurance

Stop Loss insurance protects a self-funded plan in the case of a catastrophic claim. Stop Loss coverage reimburses the employer for claims that exceed a predetermined deductible. There are two general types of stop loss coverage: specific/individual and aggregate.

Specific/individual Stop Loss Insurance

Specific/individual stop loss insurance helps protect the employer against the risk of a large claim on any individual covered by the plan. There is typically a deductible over which any claim amount is covered by the stop loss contract (e.g., $100,000 or $150,000).

Aggregate Stop Loss Insurance

Aggregate stop loss insurance helps protect the employer in the event their total health plan claims exceed a certain threshold. Typically, this threshold is set at 125% of the expected annual claims cost.

Aggregate stop loss is typically quoted as a percentage over the expected cost per employee so changes in the employer population do not increase an employer’s risk exposure. Aggregate stop loss can provide some assurance of a level funding amount and help alleviate monthly swings in claims expenditures.

Many employers purchase either specific/individual or aggregate stop loss protection. Some employers, particularly smaller employers, may want the protection of both forms of stop loss insurance.

We Can Help

American Fidelity has an experienced stop loss insurance underwriting team ready to recommend a custom solution for your organization. We also have other resources for employers who are interested in self-funded plans.